Sir, please can we leave aside blame-gaming and name-shaming? Rewriting the NSE’s response to BusinessDay’s call for the resignation of Professor Ndi Okereke-Onyiuke and Musa al-Faki.
As in other parts of the world, the securities market regulator, stock exchange and central bank in Nigeria have been in the first line of fire from commentators for the turmoil that has engulfed the local economy in the past year. For what is now judged their reluctance and, in some cases, passive complicity, in what are now considered to be abuses and excesses as well as their failure to warn about the impending crisis, even denying the vulnerability of the economy, the regulators are now fingered as having the primary responsibility for the crisis. According to some commentators, while the regulators may not be the mechanical causes of the crisis, their inertia makes them accomplices. They argue that the regulators' partial, even discriminatory, actions in the execution of their fiduciary responsibility to protect investors from market abuses by some issuers and intermediaries puts the blame squarely on their shoulders. Moreover, as the producers of the most visible and applauded metrics of economic success during the boom years, the collapse has raised major questions about, not simply the foundations of that boom, but the competence of its architects. It is in this context that BusinessDay, a leading source of economic, financial and business news in Nigeria, called for the resignation of Professor Ndi Okereke-Onyiuke, director-general of the Nigerian Stock Exchange, and Musa al-Faki, director-general of the Securities and Exchange Commission. According to the paper, the ripple effect from the developed markets' financial crisis was not the cause of the local crisis. Rather, it only exposed festering maladies which had plagued the local stock market for quite some time. The paper adjudged that the regulators' 'light touch regulation' was the cause of the crisis. In response, the Nigerian Stock Exchange issued an acerbic press release accusing BusinessDay of 'hyperbole', while identifying the paper as 'the problem in the ongoing effort to restore investor confidence in the market, because confidence cannot be erected on obvious negative and baseless media publications on the market.' The SEC has not issued a response. In this post, we provide a background to the issues then proceed to reconstruct the response of the NSE to BusinessDay.
In a presentation given in January 2009, Professor Charles Soludo, the governor of the Central Bank of Nigeria, offered a disgnosis of the causes and effects of the global economic crisis. According to him, the roots of the crisis are to be found in the banking system, and not in the securities or forex markets. Tracing the origins of the crisis to the United States, he explained that countries like Nigeria were swept up in the second round effects of the crisis.
In fact, when the first waves of the crisis hit the United States sub-prime market in the first quarter of 2007, and gradually spread to Wall Street, most experts in Nigeria, including the governor of the Central Bank denied the vulnerability of the country to its ravaging effects. At the time, oil prices were still above $100, and respected financial journals argued that emerging economies may have successfully decoupled from developed markets and were safe from the panic engulfing Europe and America.
Less than a year later, the All Nigeria Stock Index (ANSI) had peaked and began a savage slide. As with large events of this magnitude and complexity, there were a number of unique and inter-related causes. But it is tempting, and certainly much easier, to shift the explanation from analysis to blame, while a single suspect is much easier to condemn than a series of discrete factors. The heuristics is straightforward enough: if the regulators received ovation for creating the enabling environment that fostered the boom, then they should have the answers to fix the problems that have now arisen. If they can’t fix it, then it means that what they created was a time bomb that was only ticking away, which has now exploded scattering limbs and leaving carnage in its wake.
It did not take long for the cry and hue to be raised. Across the world, regulators came under fire for failing to police markets effectively and raise an alarm before the problems hit crisis proportions. In the UK, the Financial Services Authority’s light touch regulation was blamed for the reckless credit risk management of mortgage companies and market abuses, while in the US, Senator John McCain famously said that if he were president, he would fire Christopher Cox, the chairman of the US Securities and Exchange Commission.
In the circumstances, these reactions were neither entirely illogical nor unexpected. In Nigeria, trillions of naira in pension funds, household savings, parochial society contributions and business investments had evaporated in a few short months. Public sentiment about the inability of the regulators to stem the losses could be summed up in three words: bitterness, frustration and loathing.
Against the background of the economic downturn, BusinessDay organized a CEO Forum on April 8, 2009. In the words of Frank Aigbogun, the publisher:
Our aim is to be able to create the highest gathering of leading CEOs for the exchange of ideas amongst very senior level executives in Corporate Nigeria; a gathering where executives would freely be able to provide insights into their leadership styles and help provide a proper understanding of how business is run in Corporate Nigeria. It would provide practical, hands-on insight as against technical grandstanding of academia.
Naturally, at such a summit, more than strategy and operations are discussed. Since more than a handful of the presenters, sponsors and attendees sit at the helm of public companies, the market situation was bound to receive attention.
The day after the event, the paper reported that attendees at the event had emphasized the need for ‘regulatory surgery in the capital market to restore confidence in the market.’ Based on the comments of those attending the forum, this had become necessary because the ‘regulatory agencies have not done enough to restore confidence.’
Notably, Bismarck Rewane, CEO of Financial Derivatives, a financial advisory and economics research firm, stated that ‘there was already an existing crisis on the local scene before the global financial meltdown came and exacerbated the problem.’
For at least a year before the market crisis became undeniable, Rewane’s had been a prominent voice urging caution among investors as the stock prices shot through the roof. Joined by others like Ijeoma Nwogwugwu of ThisDay newspaper, they pointed to ominous signs that the season of easy profits was too good to last.
BusinessDay’s charges against the regulators can be grouped into seven categories, and eight, if one includes their inclusion of Rewane’s quote that the crisis in the stock market preceded the global financial crisis. Based on the paper’s claims, these charges, which were abated by the regulators, are isolated as the sole causes of the acute drop in the ANSI, aggressive profit-taking and loss of investor confidence on the Nigerian Stock Exchange.
We list these below:
The stock market was already in a crisis before the effects of the global financial meltdown hit Nigeria
Systematic and coordinated price manipulation
Continued trading in the shares of moribund companies
Inexplicable price movements based on non-public information
Irrational valuations and excessive trading multiples
Disregard and abuse of market and listing rules by some institutions
Antagonism between the Nigerian Stock Exchange and the Securities and Exchange Commission
Light touch regulatory regime.
Based on the reference to Bismarck Rewane, it is assumed that BusinessDay had conclusive proof that:
All of these existed before the global financial meltdown hit Nigeria
They are the substantive causes of the current crisis, and
The global financial meltdown was only an incidental event, or at best, a reinforcing [catalyzing] factor, not an initiating one.
Unfortunately, the Nigerian Stock Exchange missed a golden opportunity to address the core issues raised by BusinessDay. Instead, it adopted a publicly combative, even undignified, warface, and still failed to respond in a substantive or meaningful manner to the points raised by BusinessDay.
Let’s juxtapose the response of the NSE to that of Christopher Cox, former chairman of the US Securities and Exchange Commission, in response to Senator John McCain’s call in September 2008 for President George W. Bush to fire him for betraying the public trust by allowing naked short-selling, considered a key ingredient in the collapse of US stock prices.
It did not take long for BusinessDay to respond to the NSE.
How should the NSE have responded in the first place? Here’s our suggestion:
Throughout our alternative response, it can be seen that readers are referred to the NSE website for further information. Unfortunately, the current website of the Exchange is plagued with very poor navigation and experiences frequent downtime.
In addition to the other benefits of a well-designed, user-friendly and timely website, the NSE needs to get its online communications channel in order if it wants to retain the initiative on what information investors receive.
Below is a sample alternative home page for the Nigerian Stock Exchange website we have designed that creates room for an emphasis on news and information. Notice the central position taken by News, as well as the information rich menu.
The current home page of the Nigerian Stock Exchange website is shown below. It is important to note that although there is a ‘What’s News’ box, which ostensibly should be the News box, it does not lead to a section where all the latest news from the Exchange and archives can be found.
In conclusion, it is vital for the regulators, market participants and the press to work together in evolving solutions to the current crisis. All hands are needed on deck to weather this storm. This is certainly not the season for one-upmanship. Simply throwing around criticism or calling for the guillotine without proffering concrete solutions will achieve no purpose and, even if populist, may backfire by alienating those very segments whose knowledge and experience are critical to executing any solutions.
Neither the director-general of the Stock Exchange nor SEC works alone. They work with managers from whom their eventual successors will likely be selected or have to work with. Even if an external candidate replaces them, the managers will likely remain in place. Legacies are not that easily obliterated. Likewise, the NSE cannot succeed at its efforts to rebuild public faith in markets without the press.
We hope to see the Exchange and BusinessDay bury the hatchet and use the immense epistemic resources of their two institutions to restore investor confidence. To persist in heated public exchange is a costly distraction, counter-productive and unbecoming.
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